Government Eyes Rescue Plan For Mortgage Crisis
MICHEL MARTIN, host:
And now we turn to our Money Coach Alvin Hall, our regular contributor on matters of personal finance and the economy. The Obama administration continues to fight the ongoing foreclosure crisis. Their first set of initiatives have not been particularly successful. Now, instead of trying to keep homeowners in their homes, they are considering a new approach that compensates them if they leave.
Here to tell us more about that is Alvin Hall. He's with us from New York. Thanks so much for joining us.
ALVIN HALL: I'm glad to be here to talk about this subject.
MARTIN: So what's the point of this?
HALL: The idea is that there are more than five million households that are behind in their mortgages and are risking foreclosure, and this really threatens the economic recovery. So, rather than having these people just move out and give their houses back to the bank and have some of them ransacked by people in the neighborhood, they've decided to take a more moderate approach to encourage people to sell their houses for less than they are worth.
MARTIN: And that's called a short sale.
HALL: That's called a short sale, where your house - you have an outstanding loan that is way in excess of the value of your house, under this program -which is called House Affordable Foreclosure Alternative - you get to sell your house for whatever the market price is, and then the difference between what you owe and the sale price is forgiven by the lender.
MARTIN: And why would a homeowner want to do that? And I should mention that this program is supposed to start on April 5th. So why would a homeowner choose to do this?
HALL: A homeowner would choose to do this because of the impact on their credit. One, the - typically, people say that this only hits your credit rating or reduces your credit score by anywhere from 50 to 150 points, as opposed to a foreclosure where your credit score may drop 200 to 400 points. Also, if you go through this plan, then if you've never been in arrears on your mortgage and you do a short sale, then you can go out and almost immediately be eligible to buy another house.
If, however, you've fallen in arrears on your loan and you then want to buy a new house and, after a short sale, it would take 24 months to do it. So you can still get into the market, whereas with a foreclosure, it sits on your record for five to seven years. And that will have a huge impact on your ability to get other credit.
MARTIN: So does the administration think that many people will take advantage of this? You just mentioned that over five million homeowners are at risk for foreclosure now.
HALL: I think they're hoping people will. It's a really complicated plan that looks a lot like their home modification plan. For example, if you can get a bank who is willing to do this, then the bank that helps you arrange the short sale will receive $1,000. In the case if you have a second mortgage, and that bank is willing to participate in this, they will get $1,000. And then the people who have the loan - who have the property, excuse me, will then get a relocation loan of $1,500. So they're - I think the government is hoping that with all of these incentives, it will spur both the banks and the individuals holding the mortgages to come down, sit at the table and come up with an alternative.
MARTIN: So the idea is to move people out of houses that have lost value or houses that they can no longer afford and move them into other housing, basically, to get some movement in the market. But why wouldn't you just buy back your same house?
(Soundbite of laughter)
HALL: Ooh. Wouldn't that be interesting? For one thing, the government wouldn't allow you to do that because, basically, the lender is saying: What is this? You're buying back your house. This is a manipulation of the market. This is fraud. So you literally have to leave that property and go to another one. Also, Michel, I...
MARTIN: But why? The whole point is to manipulate the market, isn't it? The point is to get people out of houses that they can no longer afford, that have lost value.
HALL: You know, that would make - I would agree with you at one level. It would make sense to do that. But I think, if the bank has agreed to let you walk away from this property and reduce the amount of your loan through a short sale, then someone else has to buy the property. It could be a relative of yours. It could be somebody that you know, I'm sure, and you could then rent from them. But you yourself would be prohibited from buying the property, because that would be viewed as fraud. And you have to admit that if somebody did that, the banks and all the financing institutions would turn and say: Look at this. This is a scam, right? We're not going to participate in this. And the knock-on affect for other people trying to do the right thing would be huge, and it would basically bring a failure to the program.
MARTIN: How - just how does it start? Just give me the basic in the minute that we have left. What does a homeowner need to do? Does the homeowner need to find a buyer? Or does the homeowner, to participate in this, simply need to put his or her house on the market and recognize that this program exists after April 5th, when it's supposed to start?
HALL: You need to put your house on the market, find an agent who is willing to do it short sale, negotiate with the bank so the bank will know that that's what's going on, and make sure they accept the terms of the short sale. Under the program, there has to be an independent evaluation of the house, so that you're selling it at the market value.
If you get that price or more, then the lender is required to accept that price and, at the same time, forgive your other loan. It is very similar to a regular house sale, which is why I think it's much more comfortable to people, whereas a foreclosure, you're opening yourself up to the courts, their decisions, the banks and their inability to negotiate, and it becomes very difficult. And it's unknown territory for most people.
MARTIN: Well, this is interesting, Alvin. So keep us posted on this, if you will.
HALL: Thank you. I will.
MARTIN: All right. Alvin Hall is TELL ME MORE's regular contributor on matters of personal finance and the economy, our Money Coach, and he joined us from our bureau in New York. Thanks, Alvin.
HALL: I enjoyed this.
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